Profit Testing

It has been more than 20 years I learned about Profit Testing in life insurance which I acquired during my college years in University of Iowa and ever since I had almost never apply in during my entire career.  Nevertheless, I had the opportunities in several occasions, seen and being briefed pertaining the outcome of profit testing mainly on development of new life products as well as takaful products.
Now I have an opportunity to digest the entire technical aspects of profit testing as I need to present to a group of students on the same subject matter.  Interesting and challenging enough.....   For the benefit of readers, I summarize as below.

Profit testing basically a cash flow studies on the life insurance product as well as family takaful product on the future cash in and cash out.  Besides, the investment income and inflation shall also be taken into consideration during the process of calculation.  In a nutshell, the profit testing demonstrates the expected scenario in the future till the maturity of the policy pertaining the premium/contribution income, investment income (cash in) against expenses paid, commissions, taxes, reserves, claims benefits including death and living benefits. Therefore, the actuary must ensure that all the factors used in the testing must be prudent or extremely accurate based on extremely good judgement.  The outcome of the testing will lead to a decision whether to proceed selling or promoting the product or not.  Obviously, if the testing indicates a profitable outcome then it is worth to sell/promote otherwise the product shall be redesign accordingly.
However, the actuary shall conduct the testing again say on year to year basis against the actual experience of the company.  For instance, he has to test the impact of actual investment income against the assumption used.  Similarly, he may have to test against the expenses actually paid out which may differ from the assumption.  This is the part where most people failed to exercise i.e. re-testing the products.

Besides testing on individual product basis, actuary shall also conduct profit testing on the life office model or takaful office model.  This is to ensure that the entire portfolio of the company is healthy for the future growth of the company.  Just to share some experience, there are instances where the agents loved to sell/promote health and medical scheme or plans as they are so easy to sell.  Some smart agents even setup a 'permanent' station or booth somewhere within hospital or medical centre compound and start their normal persuading and convincing activities.  In one aspect it is a good move but on the other aspect it may lead to huge number of non-std lives insured.  Obviously, claims will arise as the actual experience of morbidity is far beyond the standard assumption used in the pricing.  Finally, the portfolio is a losing account.  It may be OK to have a losing account or portfolio sometimes as it is just a complimentary to other plans.  Insurance or takaful needs to embark on corporate social responsibilities as well besides profit, profit and profit. Of course, one of the activities for CSR is offering plans highly needed by the consumers.

Takaful Practice - A Guide to Examinations

In May 2010, I was offered by IBFIM to consider being their Vetting Expert/Editor for their forthcoming book on takaful.  Well, in order to ensure that my knowledge and experiences can be shared with the public, I decided to accept the offer.  After about 3 weeks of intense and thorough reading the manuscript written by two authors, alhamdulillah I managed to summarize a total of about 300 comments and suggestions to improve the book.  More or less, the draft was delivered in a good manner where a beginner and perhaps an intermediate practitioners in insurance and takaful can benefit from it.  Generally, it covers the concept of takaful in depth where the syariah perspectives on the conventional insurance was well presented.  Nevertheless, non-Moslem may encounter some difficulties as there are many arabic terminologies introduced as there are no equivalent translation in English.  Perhaps, future takaful book should introduce a complete glossary at the end for ease of reading.

Next, the book presents the different takaful products being marketed today for general and family takaful.  The content is quite comprehensive for the most common takaful products in Malaysia.  We would appreciate for those outside Malaysia to share their feedbacks with respect to the relevant products in their respective countries.  In addition, it also presents the legal issues and operational procedures such as underwriting and claims. 

After completed vetting the book, I realize that most takaful books published todate have more or less common issues such as syariah perspectives, legal, operational and products.  Thus, I am planning to write my own book on takaful but it will cover slightly different perspective and content.  Already started but still far from completion.  Hopefully, I should be able to complete before middle of next year, insyaAllah.

The Waiting is Over - 4 New Takaful Operators join the Industry

After more than a year with numerous rumors and speculations pertaining the new takaful licenses, Bank Negara Malaysia had finally released (1/9/10) the news that the following entities are awarded with new Takaful licenses but only to transact family businesses:
         American International Assurance Berhad (70%) and Alliance Bank Malaysia Berhad (30%);      AMMB Holdings Berhad (70%) and Friends Provident Group plc, UK (30%)                                               ING Management Holdings (Malaysia) Sdn Bhd (60%), Public Bank Berhad (20%) and Public Islamic Bank Berhad  (20%); and The Great Eastern Life Assurance Company Limited (70%) and Koperasi Angkatan Tentera Malaysia Berhad (30%);

Well, most of them are considered major players in the conventional insurance industry in Malaysia thus I would expect that they may kick off faster than those in the past.  AIA had been issued an ITO (International Takaful Operator) license previously thus this new takaful license would compliment well with ITO license for their aggressive market penetration.  ING may have an advantage due to to its partner which is a very strong FI in local market.  Furthermore, ING had also partnered with a local takaful operator in promoting their employees benefit schemes to the Islamic prospects giving them some exposures to the takaful management. GE had a strong agency team in conventional which definitely be their competitive edge like PruBSN Takaful.  AM Group with its subsidiary, AMAssurance, may have advantage from the partnership with oversea partner in terms of expertise and perhaps capital.  We hope to see new innovation in products and services for the benefits of Malaysians in general.
Few advise perhaps from me is that the new takaful operator shall be named with an appropriate name in accordance with the Islamic phrases and if possible try to disassociate from the conventional name.  This is critical in order to be effective in marketing strategies.  Furthermore, key personnel especially CEO must be a Moslem where this will send a positive message to the community or society that the operator is serious about doing takaful or Islamic insurance and not merely for profit.  As the license is only to transact family takaful, the core team must be those with strong family/life technical background with solid marketing experience.  There are few (one or two) leaders in the takaful operators who are general practitioners thus making their life or family business moving a bit slow than expected.
Be careful when employing those from the conventional industry as there are several aspects differ significantly in takaful operations.  Core team must comprise mainly those with solid background in takaful so that they can lead the rest towards the right direction in takaful philosophies.
I wish all those new takaful players "Good Luck and Welcome on Board" and please ensure that the main focus is strictly adhered i.e. to promote Islamic insurance with honesty, fairness and integrity.